UK Bank Resolution

The principal purpose of the Banking Act 2009 (as amended) was to introduce a special resolution regime in relation to English Banks[1] and English Building Societies.[2] The policy backdrop to the Act was the failure of Lehman Brothers in 2008 and the resultant meltdown in the financial markets, which prompted lawmakers around the world to introduce legislation aimed to curb the effects of an institution being "too big to fail".

The principal elements of the special resolution regime in relation to English Banks are:

(a) in Part 1 of the Banking Act 2009, a set of five[3] stabilisation options, being a transfer of shares or property (in the case of the latter, in whole or part) of the failing entity to a private sector purchaser, a bridge bank or an asset management vehicle; a transfer into temporary public ownership; and a bail-in;

(b) in Part 2 of the Banking Act 2009, a liquidation procedure called the "bank insolvency procedure"; and

(c) in Part 3 of the Banking Act 2009, an administration procedure, called the "bank administration procedure".

The Banking Act 2009 also granted the UK Treasury broad power to make regulations introducing a special liquidation or administration regime for investment banks, which it did by making the Investment Bank Special Administration Regulations 2011.

As a general matter, the provisions of the special resolution regime should not adversely affect the validity or enforceability of derivatives master agreements and similar netting contracts (or transactions made thereunder). On the contrary, one of the important protections introduced by the Banking Act 2009 is a "safeguards" order[4] that protects netting, set-off and similar arrangements from being disrupted by the exercise of a partial property transfer power. Further, in relation to a full property transfer, the Banking Act 2009 provides that the relevant transfer order or instrument may disapply the right to terminate transactions under a master agreement only where the right arises due to the making or existence of the order or instrument itself (so should not affect rights to terminate that arise due to other circumstances).[5]

EU Bank Recovery and Resolution Directive

The Bank Recovery and Resolution Directive (the "BRRD") introduces a European regime for the resolution of financial firms across borders within the European Union. It was published in the Official Journal of the European Union on 12 June 2014 and UK implementing legislation, in the form of six statutory instruments and an amendment to the Banking Act 2009 effected through the Financial Services (Banking Reform Act) Act 2013, was passed in December 2014/January 2015. The majority of the provisions of the legislation came into force in January 2015 and amended various pieces of UK banking and insolvency legislation (including the Banking Act 2009) to give full effect to the BRRD.

In summary terms, the new legislation implementing the BRRD does the following:

(b) it sets out the procedural requirements of various UK regulatory authorities when performing their functions under the BRRD and makes various amendments to primary and secondary legislation to ensure that provisions relating to recovery and resolution planning in such legislation comply with the BRRD;[7]

(c) it applies the bail-in stabilisation option to building societies;[8]

(d) it ensures that the special resolution regime provided for in the Banking Act 2009 complies with the BRRD and extends the powers of the Bank of England to intervene before it becomes necessary to implement resolution measures in relation to a failing financial institution. Most notably, these powers of intervention include a power to suspend, for up to 48 hours, (i) the right of early termination (which must include automatic termination, even though the legislation is unclear) of any party to a "qualifying contract" (which would include a master agreement) and/or (ii) the right of enforcement of a secured creditor with respect to its security interest. It also ensures that the UK regulatory authorities are able to comply with the requirements imposed upon them under the BRRD and creates a further stabilisation option - transfer to an asset management vehicle;[9]

(f) it makes provision for compensation where the Bank of England exercises its bail-in powers to ensure that shareholders and creditors are not left worse off as a result of the exercise of stabilisation powers than they would have been had the entity not been resolved, but instead placed into insolvency;[11] and

(g) it ensures that the existing safeguards for set-off, netting and title transfer collateral arrangements applicable in relation to the Bank of England's powers under the special resolution regime arealso effective in relation to a bail-in.[12]

The relevance of this legislation to derivatives and other financial transaction master agreements is clear.

[1] The term "English Bank" means an undertaking incorporated in or formed under the law of any part of the United Kingdom, which has permission under Part 4A of the Financial Services and Markets Act 2000 to accept deposits and which is an English registered company not subject to any other special legal or regulatory regime.

[2] The regime has subsequently been extended to English Investment Firms by Section 101 of the Financial Services Act 2012.

[3] Two of these – transfer to an asset management vehicle and bail-in – have only recently been introduced. See further below.